ALERT MEMORANDUM SDNY Rules ’s August 2020 Internal Restructuring Does Not Violate Indenture for Existing Notes

If you have any questions concerning December 23, 2020 this memorandum, please reach out to On December 17, 2020, the United States District Court for the your regular firm contact or the following authors Southern District of New York (the “District Court”) granted the summary judgment motion filed by Transocean Ltd. and Transocean N EW Y OR K

Inc. (collectively, “Transocean” or the “Company”) and entered a Richard J. Cooper declaratory judgment in favor of Transocean with regard to securities +1 212 225 2276 claims brought by Whitebox Relative Value Partners, LP and certain [email protected] Francisco L. Cestero of its affiliates (collectively, “Whitebox”) with respect to Transocean’s +55 11 2196 7201 internal reorganization and exchange transactions that the Company [email protected] undertook in August 2020 (the “Exchange Transaction”).1 Whitebox Lisa M. Schweitzer +1 212 225 2629 claimed that Transocean made material misstatements and omissions [email protected] in violation of the Securities Exchange Act of 1934 in the offering Duane McLaughlin memorandum for the Exchange Transaction pursuant to which 8.0% +1 212 225 2106 [email protected] senior notes due 2027 (the “2027 Existing Notes”) were exchanged for Sean A. O’Neal new 11.50% senior guaranteed notes due January 2027 (the “New +1 212 225 2416 Guaranteed Notes”). [email protected] Luke A. Barefoot This is an important decision for bondholders with respect to the ability of +1 212 225 2829 corporate issuers to move assets within a corporate group to structurally [email protected] subordinate investors who elect not to participate in an exchange Adam Brenneman +1 212 225 2704 transaction without violating the terms of the indenture (or seeking to [email protected] amend the terms of such indentures through an accompanying consent Jane VanLare solicitation). In particular, bondholders should be aware that the +1 212 225 2872 potentially protective reach of boiler plate “successor obligation” clauses [email protected] that require corporate successors to remain liable for the undertakings of John H. Veraja +1 212 225 2854 their predecessor may not apply where the transferor remains the 100% [email protected] ultimate beneficial owner of the assets transferred. This decision is also important for companies considering both in-court and out-of-court restructuring options. If companies are contemplating asset transfers within the corporate group as part of such transactions, companies should prepare to have such transactions closely scrutinized by stakeholders and, potentially, courts.

1 The Court ruled that the default notice that Whitebox sent to the Company on September 2, 2020 was invalid and concluded that “any associated rights or remedies for Whitebox, including acceleration of the 2027 Existing Notes, are unavailable.” Whitebox Relative Value Partners v. Transocean, 20 Civ. 7143, *14 (GBD) (S.D.N.Y. Dec. 16, 2020). clearygottlieb.com © Cleary Gottlieb Steen & Hamilton LLP, 2020. All rights reserved. This memorandum was prepared as a service to clients and other friends of Cleary Gottlieb to report on recent developments that may be of interest to them. The information in it is therefore general, and should not be considered or relied on as legal advice. Throughout this memorandum, “Cleary Gottlieb” and the “firm” refer to Cleary Gottlieb Steen & Hamilton LLP and its affiliated entities in certain jurisdictions, and the term “offices” includes offices of those affiliated entities.

ALERT MEMORANDUM

Background on the Transactions and the exchanged for up to $750m of New Guaranteed Notes. Complaint As part of the exchange, Transocean completed an internal restructuring whereby the Company caused Transocean is the world’s largest three of its wholly-owned subsidiaries, Transocean contractor for oil and gas wells based on revenue and Holdings 1 Limited, Transocean Holdings 2 Limited is based in Vernier, Switzerland. The Company, which and Transocean Holdings 3 Limited (the “Upper Tier has approximately $8b of total debt outstanding, Notes Guarantors”) to contribute all of their assets contracts its mobile offshore drilling fleet consisting of (direct equity interests in certain asset holding 38 rigs (including 27 ultra-deepwater floaters and 11 companies which own the Company’s operating assets harsh environment floaters), related equipment and (collectively, the “Asset Holding Companies”)) to each work crews primarily on a dayrate basis to drill oil and of three recently-created mid-tier notes guarantors, gas wells in technically demanding regions (with a Transocean Mid Holdings 1 Limited, Transocean Mid particular focus on ultra-deepwater and harsh Holdings 2 Limited and Transocean Mid Holdings 3 environment drilling services).2 The oil industry has Limited (the “Mid-Tier Notes Guarantors”) which experienced significant oversupply leading to a decline would only guarantee the New Guaranteed Notes.6 in prices spurred both by a reduction in demand due to The effect of this transaction was that the holders of COVID-19 and by production disputes among major the New Guaranteed Notes would have structural oil producing countries.3 As a result, many seniority over the Existing Guaranteed Notes – customers reduced capital expenditures and delayed including the 2027 Existing Notes.7 investment decisions for the remainder of 2020 On September 2, 2020, two days before the exchange resulting in several previously sanctioned offshore projects being either delayed or cancelled.4 Given offer was set to expire, funds managed by, or affiliated with, Whitebox, as holders of the 2027 Existing Notes, these conditions, the drilling industry has seen significant chapter 11 bankruptcy activity in 2020.5 filed a complaint, described above in the U.S. District Court for the Southern District of New York, alleging On August 10, 2020, Transocean announced an violations of the Securities Exchange Act of 1934.8 exchange offer applicable to three series of its Specifically, Whitebox alleged that Transocean structurally senior notes, including the 2027 Existing included false statements and withheld material facts Notes along with its 7.50% senior notes due 2026 and in the exchange offering memorandum and consent its 7.25% senior notes due 2025, (collectively, the solicitation for the New Guaranteed Notes by allegedly “Existing Guaranteed Notes”) totaling $2.25b to be falsely claiming that the New Guaranteed Notes would

2 Transocean Ltd. Form 10-Q, November 2, 2020. District of Texas to implement the terms of a consensual financial 3 Id. restructuring transaction to eliminate approximately $1.1 billion of 4 Id. the company’s debt. In re Pacific Drilling, 20-35212 (DRJ) 5 On April 26, 2020, Diamond Offshore Drilling Inc., the (S.D.T.X. 2020). On December 1, 2020 Partners, an rig contractor controlled by Loews Corp., filed chapter 11 affiliate of offshore contract driller Seadrill Ltd., filed chapter 11 bankruptcy in the United States Bankruptcy Court Southern bankruptcy in the United States Bankruptcy Court Southern District of Texas with $2.6 billion of debt. In re Diamond District of Texas with $3.12 billion in debt. In re Seadrill Partners, Offshore Drilling, 20-32307 (DRJ) (S.D.T.X. 2020). On July 31, 20-35740 (DRJ) (S.D.T.X. 2020). 2020, Noble Corporation plc, the offshore drilling contractor, filed 6 Whitebox Relative Value Partners v. Transocean, 1:20- a petition in the United States Bankruptcy Court for the Southern cv-07143 (GBD) [ECF No. 60] (S.D.N.Y. Dec. 16, 2020). District of Texas seeking to cut more than $3.4 billion of debt. 7 Transocean is also party to a revolving credit agreement, Noble Corporation plc, 20-33826 (DRJ) (S.D.T.X. 2020). On dated June 22, 2018 (as amended, the “ Revolving Credit Facility”), August 19, 2020, Valaris plc, the offshore drilling contractor with which is structurally senior to the unsecured debt securities issued the world’s largest fleet filed for chapter 11 in the United States by Transocean, including the Existing Guaranteed Notes, to the Bankruptcy Court for the Southern District of Texas with $7.85 extent of the value of the assets held by the Asset Holding billion of debt. Valaris plc, 20-34114 (MI) (S.D.T.X. 2020). On Companies. November 2, 2020, Pacific Drilling S.A. filed Chapter 11 8 Complaint, 20 Civ. 7143 1:20-cv-07143 (GBD) [ECF bankruptcy in the United States Bankruptcy Court for the Southern No. 3] (S.D.N.Y. Dec. 16, 2020).

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be structurally senior to the 2027 Existing Notes.9 At substantially all of its assets, the transferee must the time of the filing of the complaint, there was $612 assume the Upper Tier Notes Guarantor’s obligations million in aggregate principal amount of 2027 Existing to guarantee the 2027 Existing Notes.13 Whitebox Notes outstanding.10 That same day, Whitebox and argued the covenant requires Transocean to funds managed by, or affiliated with, Pacific specifically preserve the structural seniority of the Investment Management Company LLC (“PIMCO”), guarantee in the event of an internal reorganization as holders of about 25% in aggregate principal amount whereby the Upper Tier Notes Guarantors transfer or of the 2027 Existing Notes, delivered a notice of dispose of all or substantially all of their assets to other default to Transocean. Whitebox requested a subsidiaries.14 Whitebox maintained that the temporary restraining order and preliminary injunction transaction Transocean completed was a transfer of all with respect to the exchange offer, which the Court or substantially all of the assets of the Upper Tier denied on September 3, 2020. Transocean filed a Notes Guarantors to the Mid-Tier Tier Notes motion for summary judgment on September 24, 2020, Guarantors, thus triggering the “successor obligation” and Whitebox filed a cross-motion for summary provision.15 judgement on October 4, 2020.11 On October 28, Transocean, on the other hand, argued that its internal 2020, the parties had oral argument on Transocean’s restructuring transaction was explicitly allowed by the and Whitebox’s respective motions. indenture governing the 2027 Existing Notes. The Parties’ Arguments Transocean first argued that the “successor obligation” provision was not implicated because the transfer of The parties agreed on the basic facts: the Existing assets from the Upper Tier Notes Guarantors to the Guaranteed Notes are guaranteed by the Upper Tier Mid-Tier Tier Notes Guarantors was not a transfer of Notes Guarantors, which as part of Transocean’s all or substantially all of the assets of the Upper Tier internal August 2020 restructuring, transferred all their Notes Guarantors because the Upper Tier Notes assets into the newly created Mid-Tier Notes Guarantors remained indirect equity owners of the Guarantors subsidiaries but did not cause the Mid-Tier Asset Holding Companies.16 Transocean also argued Notes Guarantors to guarantee the Existing Guarantee that the “successor obligation” provision is mere Notes.12 Whitebox claimed that this transfer violated “boilerplate” and does not apply to “internal” transfers the “successor obligation” covenant in the indenture where value is not leaving the Company.17 Transocean for the 2027 Existing Notes, which provides that if an focused on the permissibility of the exchange debt Upper Tier Notes Guarantor transfers all or under the indenture’s debt incurrence provisions,

9 Complaint, [ECF No. 3] ¶ 2. Guarantor may . . . sell, lease, convey, transfer or otherwise 10 Transocean noted in its 3Q 2020 10-Q that if the Court dispose of all or substantially all of its assets to any Person . ultimately determines that an event of default exists under either . . provided however, that in the case of the . . . sale, lease, the indenture governing the 2027 Existing Notes, it is possible all conveyance, transfer or disposal of all or substantially all of unpaid principal, interest and other obligations under indentures the assets of such Subsidiary Guarantor . . . if such other governing such series of notes would be accelerated (unless waived) which could also trigger a default under the Company’s Person is not the Parent, the Issuer or another Subsidiary revolving credit facility which, if not waived, could result in a Guarantor, such Subsidiary Guarantor’s obligations under termination of the commitments and acceleration of all outstanding its Securities Guarantee must be expressly assumed by such borrowings. other Person, except in connection with a transaction in 11 Transocean Motion for Summary Judgment, 20 Civ. which the Securities Guarantee of such Subsidiary 7143 1:20-cv-07143 (GBD) [ECF No. 24] (S.D.N.Y. Dec. 16, Guarantor would be released as provided in Section 11.06.” 2020); Whitebox Cross Motion for Summary Judgment, 20 Civ. [Indenture for 2027 Existing Notes, Section 11.03]. 7143 1:20-cv-07143 (GBD) [ECF No. 38] (S.D.N.Y. Dec. 16, 14 Complaint, [ECF No. 3] ¶ 9. 2020). 15 Complaint, [ECF No. 3] ¶ 29,31. 12 Complaint, [ECF No. 3] ¶ 8. 16 Memorandum of Law in Support of Transocean Motion 13 The “Successor Obligation” provision in the for Summary Judgment, [ECF No. 25], *20-21. Indenture for 2027 Existing Notes reads “[a] Subsidiary 17 Id.

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specifically section 4.04(a)(12) which allows the agreement, Transocean created a new set of wholly- Company to incur up to $2.4 billion in debt that is owned subsidiaries below the Asset Holding structurally senior to the existing notes held by Companies, Transocean Sub Asset Holdings 1 Limited, Whitebox.18 Transocean Sub Asset Holdings 2 Limited and Transocean Sub Asset Holdings 3 Limited Transocean’s Second Internal (collectively, the “Sub Asset Holdings Entities”).21 Restructuring Transaction The Sub Asset Holdings Entities received the assets of On November 30, 2020, a day before Whitebox’s the Asset Holdings Companies.22 The Sub Asset unremedied notice of default could have ripened into Holdings Entities, now holding the assets formerly an event of default under the indenture for the 2027 held by the Asset Holding Companies, guarantee the Existing Notes, Transocean completed a second obligations under the Revolving Credit Facility.23 The “internal reorganization” transaction designed to cure Asset Holding Companies themselves (now one level the default alleged by Whitebox while having the same up from the assets) guarantee certain other obligations, net effect on the guarantees as the Transocean’s first including the New Guaranteed Notes. Given the internal restructuring transaction. Specifically, the second restructuring transaction, Transocean submitted second internal restructuring ensured that the New a letter to the Court, arguing that Whitebox’s claims Guaranteed Notes would remain structurally senior to based on the transfer of equity in the Asset Holding the 2027 Existing Guaranteed Notes. Companies to the Mid-Tier Notes Guarantors were rendered moot but still asked the Court to issue a To accomplish this goal, Transocean effectuated the ruling.24 second internal restructuring through a series of transactions and amendments to both its existing The District Court’s Decision Revolving Credit Facility and the indentures for the The Court granted summary judgment in favor of New Guaranteed Notes so that the Mid-Tier Notes Transocean and found that Transocean’s first internal Guarantors, which were the subject of Whitebox’s reorganization did not violate the “successor default notices, were eliminated by being merged into obligation” provision of the indenture governing the 19 the Upper Tier Notes Guarantors. As a result of the 2027 Existing Notes.25 The Court also noted that the merger, the Upper Tier Notes Guarantors continued to second reorganization in November 2020 “appear[s] to directly hold the equity interests of the Asset Holding have remedied any alleged harm to Whitebox.”26 Companies, as they did prior to the Company’s August 2020 restructuring transactions.20 To provide The Court concluded that the first “internal structurally senior guarantees to the New Guaranteed reorganization” did not constitute a transfer of all or Notes, and to maintain the structural seniority of the substantially all assets of the guarantors of the 2027 Revolving Credit Facility, which was required by that Existing Notes for purposes of the “successor

18 Id., *15-16. Company and Transocean wanted clarity on the issue in the event 19 Transocean Ltd. Form 8-k, December 1, 2020. it sought to undergo future restructuring transactions with respect 20 Transocean Letter to Judge Daniels, [ECF No. 57]. to that debt. 21 Transocean Ltd. Form 8-k, December 1, 2020. 25 Memorandum Decision and Order, [ECF No. 60]. 22 Id. 26 Id. *5. As noted above, Transocean submitted a letter to 23 To effectuate the second internal restructuring, the Court, asking the Court to issue a ruling despite its belief that Transocean entered into an amendment with the lenders to the that second internal restructuring mooted Whitebox’s claim. Company’s Revolving Credit Facility, which provided, among Whitebox also submitted a letter to the Court arguing the second other things, that the Sub Asset Holdings Entities would guarantee restructuring did not moot their potential damage claims if the obligations under the Revolving Credit Facility and permitted Transocean breached the indenture for the 2027 Existing Notes and the Asset Holding Companies to, among other things, guarantee asked the Court to render a decision. Whitebox Letter to Judge the New Guaranteed Notes. Daniels, [ECF No. 58]. 24 Id. Transocean noted in its letter to the Court that the same “successor obligation” provision appears in other debt of the

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obligation” provision in the indenture.27 The Court that do not assume the transferor’s guarantee analyzed both the quantitative and qualitative aspects obligations. The Court’s “all or substantially all” of the transaction to determine whether a transfer of all analysis may also be relevant to future skirmishes or substantially all the assets of the Upper Tier Notes between corporate issuers and holdout investors Guarantors occurred. Qualitatively, the Court noted because the Court accepts the notion that as long as the that relevant factors to determine whether a transfer of transferor holding company remains the ultimate all or substantially all the assets occurred include the owner of the assets, and the value of the assets has not “overall effect of the transaction on the company” and changed, the test is not triggered. If adopted by other whether the transaction “substantially changed the courts, corporate issuers may be able to argue in nature or charter of the entity’s business.”28 The Court similar circumstances that all the assets of one member found that there was no “substantive change to the of a group could be moved to another without giving fundamental purpose” of the Upper Tier Notes rise to other provisions of an indenture including Guarantors, as both before and after the transaction, mandatory prepayment obligations or events of default the Upper Tier Notes Guarantors were still holding based on sales of “all or substantially all” assets. companies that indirectly owned the same underlying Although Transocean was ultimately successful in its assets.29 Quantitatively, the Court looked at the arguments before the Court, the Company scrapped the economic value of the assets of the Upper Tier Notes first internal restructuring transaction in favor of a Guarantors.30 Here, the Court found no changes in the second internal restructuring which had the same effect economic interests of the Upper Tier Notes Guarantors as the initial internal restructuring but mooted as their equity interests in the newly created Mid-Tier Whitebox’s claims with respect to the “successor Notes Guarantors was based on the same operating obligation” provision.32 Moving forward, Transocean assets and equivalent to their previous equity interest has indicated that it may pursue similar transactions to in the Asset Holding Companies (although now with the first internal restructuring – and other companies an extra layer in between). The Court noted that with similar capital structures and debt documents may because the same underlying assets remained available do so as well. Of course, the Court’s decision may not to satisfy the Upper Tier Notes Guarantors’ debt, “the be the last word, as Whitebox has 30 days from the economic value of the [Upper Tier Notes Guarantors’] December 16th order to appeal. assets was unchanged.”31 … Conclusion This decision is relevant for both bondholders and CLEARY GOTTLIEB companies considering restructuring transactions to allow for the incurrence of additional, structurally senior debt. The Court found that a “successor obligation” provision is not implicated where a subsidiary guarantor holding company downstreams all of its equity interests in certain lower tier subsidiaries to newly created intermediate subsidiaries

27 Id. *13-14. determine if the “successor obligation” provision applied. The 28 Id. *8. Court noted that “Whitebox cannot avoid an inquiry into whether 29 Id. all of the assets of the Upper Tier [Notes] Guarantors were 30 Id. *9. transferred by simply claiming that all of the assets were 31 Id. The Court also rejected Whitebox’s argument that transferred.” Id. *10. because the Upper Tier Notes Guarantors transferred “all” their 32 This was likely because the Court had not issued a equity interests in the Asset Holding Companies to the Mid-Tier decision by the date which a purported default under the Indenture Notes Guarantors there was no need to conduct a close analysis to would ripen into an event of default.

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